Transparency push may trickle down to investors

One of the first cabs off the rank during October and November's season of annual meetings was that of Australian Foundation Investment Company (AFIC), the 90-year-old grandfather of Australia’s burgeoning listed investment company scene.

Wandering into the meeting in Melbourne was enough to make your correspondent feel decidedly young. The median age must have been pushing 80, and as proceedings stretched into a second hour, two attendees decided a short nap was in order. But a couple of sharper souls braved the slightly clubby atmosphere to pose some tricky questions to the board.

The first came when the meeting voted on the appointment of Ross Barker as a director.

Barker was previously the chief executive of AFIC, and his move to the board table struck at least one investor as beyond the pale.

One attendee at the AFIC annual general meeting questioned the appointment of former chief executive Ross Barker as a director.
Adrianne Harrowfield

"It is, in fact, a fairly well-known governance issue now that a CEO should not remain on the board looking over the shoulder of his successor," the questioner said.

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No doubt about that. The days of CEOs moving straight into directorships are all but gone, and the questioner was quick to point out that AFIC would probably be dubious if a similar transition was to occur at a major Australian company.

Outgoing chairman Terry Campbell said he understood the point, but referred to the company's long and proud history, saying: "I felt that the corporate knowledge that Ross represents was very important."

Not surprisingly, Barker's appointment received the overwhelming support of the meeting, a space in which investors tend to follow the recommendations of their directors. But the vote had raised a good question: is it a case for some money managers of do as I say, and not as I do?

This question was amplified following a discussion about the royal commission, in which several AFIC board members expressed their support for cultural change in the banks, and a shift away from the bonus-driven attitude of many big financial institutions. An investor raised a hand. Given the board’s clear distaste and concern for bonuses, had AFIC used its shareholdings in the banks to vote against their remuneration reports?

Several AFIC board members expressed their support for cultural change in the banks, and a shift away from the bonus-driven attitude of many big financial institutions.
Ryan Stuart

Campbell explained that discussion between investors such as AFIC and company chairmen, and the heads of board remuneration committees, had increased markedly in recent years. As such, much of AFIC's work on pressing points about remuneration or other governance matters was more effectively done behind the scenes.

He also intimated that AFIC was not afraid to use a bit of stick and carrot; it may tell a company it wasn't happy with an aspect of pay or corporate governance, and warn that it may vote against the following year’s remuneration report if things didn't improve.

It's hardly a declaration of war, but it is typical of the way many institutional investors approach board discussions. In the clubby world of corporate Australia, going public with concerns is largely seen as the nuclear option.

But as the royal commission forces a much higher level of scrutiny on executives of boards and management, it would not be a surprise to see this trickle down to investors.

In the clubby world of corporate Australia, going public with concerns is largely seen as the nuclear option.
Daniel O'Brien

If you rail against bonuses – or a particular director, or an accounting treatment or some other corporate governance issue – surely you should be able to demonstrate how this was reflected in the way you voted your shares.

Institutional investors in the US are required to disclose how they vote in relation to individual companies, but Australian investors seem a long way behind, despite some shifts in industry standards and legislative change.

Super funds lead the way

Michael Chandler, director of corporate governance at the local office of advisory firm Morrow Sodali, says the pressure on funds to be more transparent with their voting intentions is rising, led in no small part by superannuation funds. These giants are increasingly bringing their corporate governance functions back in-house and beefing them up such that they can use their clout to effect change.

A good example is AustralianSuper's policy of voting against director re-elections on ASX 200 companies with single-gender boards, unless the company can demonstrate its commitment to gender diversity in the future.

But the best example is surely provided by Local Government Super. Three years ago the fund set up a website that hosts a searchable directory that displays not just its voting record, but its voting intentions.

Will the market demand this level of transparency from other investors? Perhaps not, but unless institutions are prepared to plant their flag on big issues – such as bank bonuses – they might find themselves forced to show their hand on every single matter.